Thursday, April 29, 2010

In an effort to promote greater transparency between buyers of securities and the firms that sell them, Senator Ron Wyden (D-Ore.) has filed an amendment to the financial reform legislation that would force financial firms to clearly state, among other things, any financial stake they have in seeing their product lose value. The Wyden Amendment is based on a belief that transparency and accountability are essential to a functioning market and that the amendment would bring those attributes to an area of finance that has notoriously operated in secret.

The Wyden Amendment would require the new Financial Stability Oversight Council to put forward rules requiring any seller of a financial product to disclose to the purchaser whether the seller would benefit financially if the product lost value. While Sen. Wyden identified disclosure of short positions made against clients as the immediate priority for the Council, he said that a case can be made for disclosing all of a firm’s financial positions related to products that they are marketing.

Financial firms have been selling more and more complex financial products and instruments and in some cases hedging their bets against the failure of those complex products. Wyden’s legislation intends simply to require sellers of these products to be honest and forthright with customers. The new Financial Stability Oversight Council is given broad authority to push forward a wide array of rules to promote transparency. The Wyden Amendment would require the Council to prioritize rules that require disclosure when firms bet against their clients.

According to Senator Wyden, the financial services industry has used the sin of omission and the sheer complexity of their products to hide their hedging and their real views about the value of their products..